How do unsecured loans work?
To get an unsecured loan, you’ll have to fill out an application. Oftentimes, lenders will allow you to prequalify for an unsecured loan so you can see the rates you qualify for without having to go through a hard-credit pull that would impact your credit score. Because you don’t need collateral for an unsecured loan, your approval will depend heavily on your creditworthiness—that is, a lender’s trust in your ability to pay back your debts.
If you choose to proceed with the loan, you’ll have to verify the information you provided, including your identity, income and residency.
Once you’re approved for a loan, you’ll pay it off in monthly installments with fixed-interest rates. Unsecured loans typically don’t have prepayment penalties, so you may be able to pay off the loan early without being charged extra, if you choose.
Types of unsecured loans
Some of the most common forms of unsecured loans are:
- Personal loans
- Student loans
- Credit cards
Personal loans are lump sums provided by lenders that can be used for a variety of purposes. They may come with origination fees, carry fixed rates and are commonly repaid on a monthly basis.
While personal loans cannot be used for educational or business expenses, student loans are specifically offered to help cover post-secondary education expenses such as tuition, room and board and books. Credit cards, on the other hand, work similarly to a line of credit and are a way for individuals to cover various costs and even earn rewards.
Unsecured loans with guaranteed approval
Some payday lenders will advertise unsecured loans with guaranteed approval. This is a risky path to take because these loans come with short terms and often exceptionally high interest rates. It’s best to avoid unsecured loans with no credit check or guaranteed approval.
